Annuity Obligation

The organization's obligation to pay an annuity is not acquisition indebtedness if the annuity meets all the following requirements:

1. It must be the sole consideration (other than a mortgage that is discussed under Property Acquired by Gift, Bequest, or Devise earlier in this chapter) issued in exchange for the property received,
2. Its present value, at the time of exchange, must be less than 90% of the value of the prior owner's equity in the property received,
3. It must be payable over the lives of either one or two individuals living when issued, and
4. It must be payable under a contract that:
1. Does not guarantee a minimum nor specify a maximum number of payments, and
2. Does not provide for any adjustment of the amount of the annuity payments based on the income received from the transferred property or any other property.

For information about computing the present value of an annuity at the time of exchange, contact the IRS at (410) 962-6058 or (410) 962-6059. The call is not toll free.

Example. On January 1, 1998, X, an exempt organization, receives property valued at $100,000 from donor A, a male age 60. In return X promises to pay A $6,000 a year for the rest of A's life, with neither a minimum nor maximum number of payments specified. The annuity is payable on December 31 of each year. The amounts paid under the annuity are not dependent on the income derived from the property transferred to X. The present value of this annuity is $81,156, determined from IRS valuation tables. Since the value of the annuity is less than 90 percent of A's $100,000 equity in the property transferred and the annuity meets all the other requirements just discussed, the obligation to make annuity payments is not acquisition indebtedness.

Previous| First | Next

Publication Index | IRS-Forms Main | Home